December 13, 2009

Dong deposits attract more interest with key rate hike

VNBusinessNews.com – Local banks have increased interest rates on dong deposits to attract funds following the central bank’s move to raise the base rate.

Soon after the benchmark rate was raised from 7 to 8 percent effective this month, commercial banks lifted up their dong deposit rates by 0.7-1.3 percentage points to more than 10.5 percent per year, the State Bank

of Vietnam said in a weekly review.

But the maximum rate was later adjusted down to 10.49 percent, the highest rate possible allowed by the central bank.

Vietnam became the first Asian economy to increase borrowing cost when it raised the benchmark rate. The new cap is 12 percent for lending and 10.5 percent for deposits.

Before the central bank’s move, lenders had said they were finding it difficult to attract funds despite offering up to 10.3 percent a year on deposits. They said they could hardly hike the rate further as the margin between lending and deposit rates was dangerously narrow.

In a positive sign, liquidity at lenders has improved after the key rate hike, the central bank said. One week after the move, total deposits in the banking system surged two percent from the figure at the end of November, extending this year’s growth to 27 percent.

Best option

Cao Sy Kiem, a member of the National Financial and Monetary Policy Advisory Council, told Tuoi Tre newspaper considering all movements in the monetary market, making dong deposits is the best investment option now.

Local banks used to offer higher rates on deposits with longer terms, but it is no longer the case. Viet A Bank and Eximbank, for instance, both set rates on three-month deposits higher than all other terms.

Pham Duy Hung, general director of Ho Chi Minh City-based Viet A Bank, said as most customers favor short term deposits between one and three months for their flexibility, banks have to raise rates on these terms.

Ho Huu Hanh, director of the central bank’s branch in Ho Chi Minh City, said deposit rates would not go up much from now as more expensive funds would create a cost pressure on banks.

With the maximum rate already applied to some term deposits, banks in fact have limited room to raise their rates.

The State Bank of Vietnam said in a statement on December 2 that it would inspect local lenders that offer dong deposit rates of 10.5 percent and higher. Commercial banks will have to cap their deposit rates at less than 10.5 percent to “create stability in the interest rate levels,” the bank said.

Le Xuan Nghia, vice chairman of the National Financial Supervision Commission, said interest rates in Vietnam would remain quite stable through at least the first quarter next year as the central bank would make strong interventions in both interest rates and foreign exchange rates.

Forex market

Liquidity in the foreign currency market has also “improved noticeably,” the central bank said in the weekly review.

It had said earlier this month it would sell US dollars to commercial lenders with foreign-currency deficits of more than 5 percent to help stabilize the market.

“Many companies have started selling foreign currency to the banking system,” it said.

Do Duy Thai, chairman of Viet Steel Group, said his company was able to buy dollars from banks at official rates now. It was unable to do so last month.

Vietnam’s central bank has been struggling to ease a dollar shortage that has extended the gap between official and black-market exchange rates. Policy makers have devalued the reference rate for trading and narrowed the daily trading band for the dong against the US dollar.

The dong traded at 19,600 a dollar on the black market as of Thursday morning, compared with the 19,890 on November 24.

The central bank last week requested the police to pay more attention to illegal activities on the currency market and impose strict penalties against violators.